Download Faculty of Social Sciences School of Business Managerial

Faculty of Social Sciences
School of Business
Managerial Accounting
Examination December 2014
English
_________________________________________
Date:
Monday 15 December, 2014
Time:
4 hours / kl. 9-13
Total number of pages including the cover page: 7
Total number of questions:
4
The candidate must answer all questions and their parts.
Be presise.
Answers are only accepted in English.
Reference aids allowed:
Calculator (as specified in regulations for use of calculator).
One dictionary: Native language - English/English - native language or
English – English.
Note:
The candidate must ensure that the answer set is complete.
The candidate’s name must not be written on the answer sheets.
Please write with a blue or black ballpoint pen.
Emnekode:
ØABED3100
(ORD)
Question 1 (7 + 9 + 9)
a.
A small firm, ABC Company (ABC), has the following information about its expenses:
Total variable expenses are NOK 32 000; total fixed expenses are NOK 25 200; and the sales revenue
needed to breakeven is NOK 42 000.
You are required to determine ABC’s:
i.
Current sales revenue, and
ii.
Operating income.
b.
One of your friends has recently started an online retail business selling only two products. The sale
price of Product A is NOK 5 per unit and sale price of Product B is NOK 3 per unit. The variable cost of
Product A is NOK 2.5 per unit and variable cost of Product B is NOK 1.5 per unit. Currently he is selling
three units of Product B for every unit of Product A. Following is the income statement of his business
for the month of November 2014.
Income Statement for the month of November 2014
NOK
Sales revenue
103,000
Variable expenses:
Cost of goods sold
28,000
Marketing expenses
10,000
General & administrative expenses
3,000
Total variable expenses
41,000
Contribution margin
62,000
Fixed expenses:
Marketing expenses
34,650
General & administrative expenses
7,350
Total fixed expenses
42,000
Operating income
20,000
Required:
i.
Determine monthly breakeven point in the number of units of Product A and Product B. Show
only two category of expenses: variable and fixed.
ii.
Compute margin of safety in NOK.
iii.
Use the operating leverage factor to determine the new operating income if sales volume
increases by 15%. Assume that sales mix remains unchanged.
c.
Lin is owner of a business producing and selling three products: X, Y and Z. Her business generates
NOK 3 billion in annual sales. Lin is considering an investment of NOK 45 million in a manufacturing
plant that will produce all three products. The plant has a life of 15 years after which it would have no
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residual value. Lin uses straight-line depreciation method. Cost of production on the three products is
given below:
X
Direct materials
Direct labor
Variable manufacturing overheads
15
10
5
Y
Per unit
10
5
2
Z
25
15
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Moreover, following are the estimated price and sales data.
Price (NOK/unit)
Annual sales (units)
X
Y
Z
130
75
225
487,200 150,000 100,000
Lin gets an annual salary of NOK 2 million, and incurs an annual marketing and administrative
expenses of NOK 300,000.
When she was considering this investment, a local competing business offered her to supply Product X
for NOK 40, Product Y for NOK 25, and Product Z for NOK 65.
Please help Lin to evaluate this ‘make or buy’ decision. She also needs your advice on strategic
considerations of this outsourcing offer.
Question 2 (17 + 4 + 4)
a.
A preliminary analysis of a grocery company shows that the packaged food department is the most
profitable. Consequently, the company is considering to increase its space the most. Assume that the
company has only three departments: produce, packaged food and meat. The most recent annual
report shows sales of NOK 3,283,200, which generated a gross margin of NOK 883,200. Sales and gross
margins of the three departments are as follows:
Produce
Sales revenue
Cost of sales
Gross margin
634,800
480,000
154,800
Packaged food
NOK
1,680,480
1,200,000
480,480
Meat
967,920
720,000
247,920
Total
3,283,200
2,400,000
883,200
In addition to cost of products sold, the store has NOK 720,000 of support costs, so operating income
is NOK 163,200 (883,200-720,000). Currently, the company uses cost of products sold as a costallocation base for allocating support costs. After attending a seminar on activity-based costing, the
CEO of the company suggests that the company should undertake further analysis before deciding
which product gets the largest increase in space. He has asked you to lead this analysis. Specifically, he
asks you to:
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i.
Compute the operating income and the operating income as a percent of sales for each
department using the existing system. Use this information to assess the relative profitability
per NOK of sales of each of the three departments.
ii.
Develop product costs using an activity-based accounting system. You determine that there
are five major activities, each with a different cost driver to be used as a cost-allocation base:
a. Ordering – Placing of orders for purchases
b. Delivery – Physical delivery and receipt of merchandise
c. Shelf-stocking – Stocking of merchandise on store shelves, including ongoing
restocking
d. Customer support – Assistance to customers, including check out and bagging
e. Produce monitoring – Constantly checking on the stacking and freshness of produce.
The cost drivers for each activity are as follows:
Ordering
Delivery
Shelf-stocking
Customer support
Produce monitoring
Number of purchase orders
Number of deliveries
Hours of stocking time
Number of items sold
Direct trace to Produce Department
You have determined the following information about the cost drivers:
Number of purchase orders
Number of deliveries
Hours of stocking time
Items sold
Produce
1,440
1,200
216
50,400
Packaged food
3,360
8,760
2,160
441,600
Meat
1,440
2,640
1,080
122,400
Total
6,240
12,600
3,456
614,400
The total cost of each activity was as follows:
Activity
Ordering
Delivery
Shelf-stocking
Customer support
Produce monitoring
Total
Cost (NOK)
124,800
201,600
138,240
245,760
9,600
720,000
Using these data and activity-based costing, calculate the operating income and operating
income as a per cent of sales for each product.
iii.
Propose a strategy for this decision. Which information, that based on the current costing
system or that based on the activity-based costing system, is most useful? Why? What
additional information would you like to have before making a more definitive
recommendation on the strategy?
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b.
Please differentiate between static and flexible budgets.
c.
What is the impact of under-recovery and over-recovery of overheads on current period income
statement and balance sheet?
Question 3 (12 + 9 + 4)
a.
An electronics manufacturer has multiple divisions that considered as profit centers and the mangers
of these divisions are free to negotiate transfer prices. Two divisions are negotiating the internal
transfer price of Part A that is produced by Division 1 and sold internally to Division 2 as well as
externally to many other customers. Per unit prices and costs for the two divisions are as follows:
Division 1
Sales price to external customers (NOK)
Internal transfer price (NOK)
Costs
Variable cost per unit (NOK)
Total fixed costs (NOK)
Budgeted production (Units)
14
?
10
320,000
640,000
Division 2
Sales price to external customers (NOK)
Costs
Two Part A (internal transfer cost), per unit (NOK)
Other parts, per unit (NOK)
Variable cost, per unit (NOK)
Total fixed costs (NOK)
Budgeted production (Units)
i.
ii.
170
?
85
45
640,000
16,000
Compute the maximum transfer price per unit the Division 2 would be willing to pay to buy
Part A from the Division 2.
Compute the minimum transfer price per unit at which the Division 1 would be willing to
produce and sell wheels to the Division 2, assuming that the Division 1:
a. Has excess capacity.
b. Has no excess capacity.
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b.
Please fill in the missing information of the following three unrelated French companies.
Company A
Company B
Company C
€
Sales
114,000
?
484,000
Operating income
39,900
117,000
?
Total assets
71,250
?
?
Sales margin
?
15%
10%
Capital turnover
?
2.5
?
Return on investment
?
?
22%
10%
22%
?
?
?
4,400
Target rate of return
Residual income
c.
i.
ii.
What is benchmarking?
What is business process reengineering?
Question 4 (17 + 8)
a.
The Chocolate Company, a Swiss manufacturer of fine chocolates, uses standard costs and a flexible
budget to control its manufacturing costs. The purchasing agent is responsible for material price
variances and the production manager is responsible for all other variances. Operating data for the
past week are summarised as follows:
i.
ii.
iii.
iv.
Finished units produced: 4,000 boxes of chocolates.
Direct materials: Purchased and used, 4,300 pounds of chocolate at Swiss Francs (CHF) 15.5
per pound; standard price is CHF 16 per pound. Standard allowed per box produced is one
pound.
Direct labor: Actual costs, 6,400 hours at CHF 30.5 per hour. Standard allowed per box
produced is 1.5 hours. Standard price per direct-labour hour is CHF 30.
Variable manufacturing overhead: Actual costs, CHF 69,500. Budget formula is CHF 10 per
standard direct-labour hour.
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Compute and interpret the following:
1.
2.
3.
4.
5.
6.
7.
Materials purchase-price variance
Materials quantity variance
Direct-labour price variance
Direct-labour quantity variance
Variable manufacturing-overhead spending variance
Variable manufacturing-overhead efficiency variance
Budget allowance for direct labour? Would it be any different if production were 5,000
boxes?
b.
The following budget estimates have been prepared by The Spanish Company:
May
June
Cash Receipts
€120,000
€110,300
Cash Payments
€150,000
€150,000
The company likes to maintain a minimum cash balance of €40,000. Any excess cash is invested in a
money market account earning 9 percent compounded monthly. Interest is reinvested in the money
market account. Any cash deficiencies are covered by a withdrawal from the money market account. If
additional cash is needed, the company has a line of credit at 12 percent interest with the local bank.
Interest is paid monthly. Assume a cash balance on May 1 of €40,000, a money market account
balance of €0, and a credit line loan balance of €0.
Please prepare a cash budget for May and June.
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